Trustees urged to hang tight with investment strategies as two-pot takes effect
Pension fund trustees are being advised to wait until the implications of two-pot withdrawals on their funds are clearer before changing investment strategies.
The magnitude of withdrawals and trends in the months following the system’s launch at the beginning of September will guide the direction retirement trustees should take with their funds, says Tino Mombo, an actuarial specialist at Novare Holdings.
“For us, it’s about helping trustees achieve the best returns for retirement fund members with the least amount of risk”, he says.
“Each fund would need a unique approach to how they manage any changes to their investment strategies now that the two-pot system is finally in place”.
While called the two-pot system, the new legislation essentially divides pension funds into three: a savings pot, a vested pot and a retirement pot.
It is aimed at improving savings and preventing early withdrawals when people leave their jobs.
As of 1 September, seed capital will be transferred to the savings pot. The seed capital will be limited to 10% of the amount in your retirement fund account on 31 August, subject to a maximum amount of R30,000.
The balance of the funds accumulated until 31 August will remain in the vested pot, which is only available at retirement or resignation.
From 1 September, one-third of contributions go into the savings pot whilst two-thirds go into the retirement pot.
Funds in the retirement pot are accessible only at pensionable age. You can withdraw any amount from the savings component, provided it is at least R2,000.
Withdrawals are allowed only once per tax year and will be taxed according to your marginal tax rate.
According to the SA Reserve Bank, the new retirement rules may result in pension fund members withdrawing between R60 billion and R140 billion from their savings portion between now and the end of next year.
About 6.5 million people contribute to pension funds annually; historically, about R360 billion is withdrawn from the system each year, of which resignations account for between R80 billion and R100 billion. Withdrawals from the savings portion would add to those outflows.
Consumers are expected to withdraw funds from their savings to pay down debt and fund living expenses that increased due to an acceleration in inflation and rising interest rates.
However, because these withdrawals are taxed and incur fees, pension fund members will likely be less inclined to take money from their savings unless necessary in future years.
“As the implementation of the two-pot system unfolds in the next year, pension fund trustees and their consultants will need to keep a close watch on emerging trends”, Mombo says.
The reason for this is that as members demand access to their money, pension funds need to dispose of some of the fund’s holdings in other investments to convert them into cash.
These could be investments in harder-to-sell assets such as tightly held shares, long-term bonds, property investments, private equity, hedge funds, unlisted companies, or loans provided to private companies.
“Markets have performed well, so any withdrawals will be made after most investments have shown a strong performance”, Mombo says.
“You could argue this may not be the worst time for the two-pot system to be kicking in, as members will not be withdrawing when markets are down and incurring losses”.
Funds with low withdrawal rates can maintain their investment strategy with minor adjustments to ensure sufficient liquidity.
To diversify returns, these funds can consider investing in more aggressive, riskier investments that offer potentially higher returns, such as private equity and credit.
However, funds experiencing high depletion rates each tax year would need to structure their portfolios differently.
“These funds can’t take on significant amounts of risk”, the Novare specialist says.
From an investment strategy perspective, funds seeing higher withdrawals would probably avoid alternative assets and hedge their positions in shares against potential losses through special financial instruments.
These funds would hold more short-term bonds due to their deeper secondary market and higher liquidity, making them less risky and easier to buy and sell.
At least trustees have some time to consider their options; funds first need to calculate the amount that will go into members’ savings component, which could take anything from days to weeks, depending on the fund’s rules.
Once that is done, members can submit their requests for withdrawals, subject to other administrative hurdles such as the verification of members’ identification, bank details and tax numbers.
Tax directives would then need to be sought, and, only if they owe no tax, would the money be paid to them.
“Trustees will need to constantly monitor member behaviour,” Mombo advises. “Withdrawal patterns in the first year may differ significantly from patterns in subsequent years.”
Loading ...
